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Questions & Answers

What role will Apple and Google play in the automotive business? Will the prominence of conventional car manufacturers be diminished? How does Conti see itself in the new balance of power?

We believe that the strong automotive manufacturers on the market today will retain their positions. The global automotive markets are expanding, so there would still be room on the market. New Chinese manufacturers are testament to this. The knowledge that already exists in the field of connectivity, such as that regarding interfaces between technologies, end devices and users, it would most certainly be an enrichment if IT companies were to tap into this market for themselves.

What role do acquisitions play in your plans? Do you have any specific projects, and what are they?

Naturally, we are continuously analyzing potential candidates and have some ideas, but we do not envisage any further major acquisitions in the next few months.

Major manufacturers such as Volkswagen are carrying out efficiency and cost-containment programs. How is this affecting you as a supplier?

We know our customers’ programs, which –incidentally – don’t just relate to purchasing volume. We have been working together with our customers in a trusting partnership for decades. Annual optimizations are part of our business. We are always working on solutions that are in the interests of both our customers and Continental as our company.

How high will the dividend be?

We want to increase the dividend for the third time in a row and propose a payout of €3.25 per share. The dividend payout ratio is therefore 27.4%, up again slightly on the previous year’s level.

Regarding the goal of €50 billion in sales by 2020: what shares are Automotive and Rubber expected to contribute respectively? Also, how much organic growth does this involve and what share is expected to come from further acquisitions?

€50 billion is a realistic target for 2020 considering that it is based on production figures of between 100 million and 105 million cars and light commercial vehicles with a weight of up to six metric tons, as well as on the growing numbers of vehicles fitted with our products and systems. Additional sales could be generated through potential acquisitions. During this time span, we would expect sales to increase by around 7% whilst global vehicle production grows at an annual rate of about 3%. We would therefore grow considerably faster than the market.

How will net indebtedness develop in 2015? Is a further reduction likely, or will the Veyance acquisition trigger a rise?

We are planning on achieving free cash flow of at least €1.5 billion before acquisitions. The costs of the Veyance acquisition amount to €1.4 billion. The acquisition should therefore be financed from free cash flow. However, we must take into account that the proposed dividend of €3.25 per share – coming to a total of around €650 million – also needs to come from free cash flow. As such, we expect indebtedness to be slightly above the level of 2014 by the end of this year, i.e. slightly more than €2.8 billion.

There were reports that Apple will produce a car in 2020. Are you currently in talks with Apple about these plans? Would you be interested in a partnership?

Apple has an excellent reputation in the market for information, IT, and communication systems and has incredible financing capacity. If Apple were to decide to expand into the automotive industry, we would of course be available to them as a supplier and partner with systems expertise, as we are already today for all our customers worldwide.

Supplement: We are already working in close collaboration with Apple on a number of projects, are in talks about interfaces as well as about future requirements in terms of connectivity and operation – particularly involving the integration of mobile end devices in vehicles."

Do you want to expand your software capability primarily through acquisitions? If so, where, and in which countries? Do you already have acquisition targets?

Acquisitions in the area of technological expertise on the automotive side are conceivable. Likewise in the area of software.

How has the first quarter started off? Are you able to tell us how sales and EBIT have progressed in the first two months of the year?

2015 began on a pleasing note and confirmed our expectations for the year as a whole.

What margin are you expecting for Veyance in 2015? What was the comparative figure for 2014?

We are expecting an adjusted margin of 8% in 2015. The margin for 2014, when the company did not yet belong to us, was around the level of our ContiTech division.

Subsequent question about the Veyance margin: When will the margin return to the level of ContiTech – and when is it expected to surpass this level?

Veyance is being integrated into our ContiTech division, whose medium-term margin target is 12% plus. Considering the integration of Veyance, this target will not be reached within the next two years.

Do you already have any specific acquisition targets for this year? What is Continental looking for exactly – and where?

Geographically speaking, Asia would make a lot of sense for us. Other than this, we also intend to further strengthen the industrial and aftermarket business. However, acquisitions in the automotive sector which would consolidate our existing expertise are likewise not being ruled out.

How high is the current comparative figure for the 100 million to 105 million light vehicles forecast?

In 2014, around 87.4 million passenger cars and light commercial vehicles were produced. In 2015, we are anticipating growth of around 2% to approximately 89 million units.

In light of the low interest rate, by how much are you hoping to further reduce net indebtedness? Thank you!

Our gearing ratio was 26.4% at the end of 2014. Our target is below 20%. Of course, we must take into account that the year-end value is currently higher due to the Veyance acquisition with around €1.4 billion in additional liabilities. This has taken us to over 26%, and it is likely to be another two years until we reach the target. Provided, of course, that we continue to generate cash as we have done so far.

What share of sales does the non-automotive business currently account for, after the Veyance acquisition?

The Veyance acquisition has increased the share contributed by industrial and aftermarket business to the corporation’s consolidated sales. It was around 27% at the end of 2014, and is now around 30%.

Regarding new competitors, what business does Conti already do with Apple and Google? Also, have these corporations poached any Conti employees yet?

I wouldn’t like to rule out the fact that some may have switched sides, and vice-versa. Take our new intelligent transportation systems business unit headquartered in Silicon Valley, for example. Here, we ourselves managed to headhunt a top manager from the IT industry. We also operate as a supplier for Google, and in turn, Google is also a supplier for us. The future will show what may transpire with Apple.

You spoke about the fact that software is an important growth driver for Continental. What role is India playing in this respect, given the considerable software expertise offered by this market?

We are actually in the process of strengthening our software expertise. We currently have around 11,000 Continental employees working in software development, and India is playing a particularly important role here. We already have a number of developers working for us in India, and we envisage that this number will increase rapidly.

After the impairment losses last year, what prospects do you currently envisage for business with hybrid and electric drives? What is happening with the joint venture in Korea? How is the HEV business unit expected to develop, and when do you intend to generate a profit?

Firstly, we need to acknowledge the fact that business with electric and hybrid vehicles has developed significantly slower than we anticipated four or five years ago. Having said that, the electrification of drive technology is inevitable. Otherwise, we will not be able to meet the legal provisions for CO2 emissions for 2020 and beyond. This applies particularly to large vehicles. This means that we will continue to invest in this area as before. For mid-range vehicles, it is becoming apparent that technologies such as the 48-Volt system will gain acceptance. For premium vehicles, it will probably be plug-in technology. This technology can be used to charge vehicles with electric current and to drive for certain stretches of between 30 and 60 kilometers on electric power alone. We estimate that the market shares in this area will increase to 15% to 20% by 2025. This includes hybrid and fully electric vehicles. However, the share of fully electric vehicles will still be relatively small, even in 2025. We foresee higher growth rates only after this point, on account of falling prices – particularly for battery cells. For us and the entire industry, this means that we will have to tide over the next few years until significant volumes are feasible in the market. We will need to continue to invest to make the technology more efficient and more cost-effective. Unfortunately, this means that there is no money to be made in this area for the next three to four years at least. The joint venture in this area was dissolved. We have reintegrated around one hundred of our engineers from this joint venture – specialists in battery cells, electronics, and sensor technology – back into our existing organization.

What signs is the Powertrain division showing, after suffering high impairment losses in Q3? What is the (adjusted) forecast for the global ramp-up of e-mobility? Does Conti perceive the target of a million electric plug-in vehicles in Germany by 2020 to be realistic?

By way of comparison, between four and five years ago it was predicted that hybrid and purely electric vehicles would have a share of 25% or more of the total market by 2025. These forecasts have been significantly lowered. They are now in the region of 15% to 20%. So you can see that things have progressed over the past few years – unfortunately in the wrong direction. We considered the target of a million electric plug-in vehicles in Germany by 2020 to be very ambitious from the outset, and in light of the developments outlined above, we no longer consider the target to be realistically achievable.

Forecasts predict that China will make up around 30% of the automotive world by 2020. However, according to previous statements, Conti intends to generate “only” 20% of sales there. Does this mean that the company is passing up opportunities here?

No, we are definitely not passing up any opportunities here. It is true that out of 100 million passenger cars produced worldwide, China will foreseeably produce 30 million of them. So the ballpark figure of 30% is correct. However, it does not correlate 1:1 to our share of sales. The value percentage in China is still considerably lower than that of markets such as North America and Europe. As such, 20% converted in line with the value percentage represents a reasonable target.

Mr. Degenhart, how is Continental responding with the corporation’s product portfolio to the requirements of the new driving cycle, WLTP?

We anticipate that the introduction of the new driving cycle, WLTP (Worldwide harmonized Light vehicles Test Procedure), will not be used to ratchet up the existing limits. That would be an excessive step. The motivation behind the introduction of the WLTP is to determine more realistic consumption levels that are binding for all and at the same time ensure comparability. For good reasons, which date far back into the past, we are still too far away from this today. The most important thing is what we are doing to help our customers meet the emissions limits. The key target for 2020 is >95 grams of CO2 per kilometer. We are investing heavily in injection technologies and, in the past four years, have developed brand new generations of both gasoline and diesel injection systems. We are also working in the field of exhaust gas aftertreatment. The acquisition of EMITEC allows us to present ourselves as a systems supplier to our customers. Another important area is algorithms – software that also helps to optimize fuel consumption. Not to mention sensor technology, which is undergoing continual development and will become increasingly important as a core competency for a systems supplier like Continental.

€2.4 billion is a good result – but not good enough to hold a “real” press conference? Is a virtual press conference more cost-effective than one held where everyone is physically present?

It is more cost-effective, for a number of reasons. It is not a matter of restricting the information provided or answering questions depending on the level of sales. We respond to all kinds of questions – including here – live, electronically, and digitally. The idea is to make our Executive Board members available more often. Not just the evening before a financial press conference, when you can’t even talk about many topics because the figures aren’t due to be released until the following day. So we decided to look at the information we provide as a whole and re-tailor it to suit your requirements. We also invite you to take part in additional meetings and talks that involve a direct dialog with Executive Board members and, in doing so, we are increasing the amount of information on offer. Coming back to your specific question, the large profit is inspiring us to expand the information we provide because we believe there are a lot more specific requirements out there than we are able to deal with in a general financial press conference.

What are the new features of the stereo camera, the new generation of which is set to be launched in the coming year?

"With all sensor technology, regardless of whether we are talking about camera, radar or laser-based technology, the idea is to record a vehicle's surroundings as completely and precisely as possible. Every sensor system has its physical strengths and weaknesses, and the combination of various physical principles is intended to enable the surroundings to be detected as precisely as possible. The stereo camera plays an important role here, since in principle it does the same thing we do with our two eyes. The stereo camera can distinguish between objects – according to their shape, size, and distance. This enables us to improve safety because we can distinguish between people, animals, and objects. We will be able to detect whether a person or an animal is moving away from or toward the vehicle. And we can identify the speed at which they are moving. Consequently, we are able to calculate the extent of the risk of a collision with the vehicle. These are all strategies that, at the end of the day, are stored in the software and serve to significantly increase the precision and probability with which we can avoid accidents involving animals and people. Mono cameras do not offer these functionalities at anywhere near this level of quality.

Supplement: Compared with the previous generation, the new generation of our stereo camera is faster, more compact, and has a higher resolution. Overall, the new generation is the foundation for improved situation awareness.

The mild winter has affected the winter tire markets. What impact has this had on Continental’s sales volume?

In the fourth quarter, the winter tire markets in Europe contracted by eight percent year-on-year. Naturally, this had a negative impact on our tire sales in the fourth quarter. Nonetheless, we were able to sell 22 million winter tires. This meant that we were able to maintain our strong position in this sector, and we sold almost as many tires as in the previous year. Overall, we managed to increase our sales volume by three percent in the past year, despite this weak period in Europe in the fourth quarter. For 2014 as a whole, the European tire market registered growth of only two percent.

What are the HR and capital expenditure targets for 2015 and by 2020 for your headquarters in Hanover and for Lower Saxony?

In the past year, we hired over 300 additional employees, both in Lower Saxony and at our Hanover location. We also expanded our expertise in tire research at these locations and made a number of investments in the field. And this trajectory will continue over the next year as the tire sector grows. In addition, ContiTech has gained even greater significance as a result of the Veyance acquisition and, as such, additional growth is expected in this area – including at the locations.

Supplement: As at the end of 2014, Continental employed around 12,400 people in Lower Saxony, 7,800 of which in Hanover alone.

A number of automobile manufacturers have ramped up their cost-cutting efforts. Are you experiencing increased pressure on margins as a result of this?

Pressure to cut costs, and therefore to reduce prices, has always been high in the past, particularly in the years since the crisis in 2009. This pressure will remain high. This is business as usual for us and we have not been able to detect any shift in this trend.

Returning to the subject of 2020, how much are sales in “automated driving” expected to contribute to the figure of €50 billion?

To answer this question, we first have to clarify what in our product portfolio we define as contributions to sales in the area of automated driving. Advanced driver assistance systems, which form the technological foundation for enabling automated driving, clearly come under this category. Our sales of advanced driver assistance systems are expected to grow from around €500 million in 2014 to €1.5 billion by 2018 alone. This represents an annual growth rate of 30%. Additional sales will come from other electronics and tools that are required to enable automated driving.

How many external participants are there exactly? Have you done a breakdown of journalists, analysts, and perhaps the number of callers from abroad?

We have around 60 journalists taking part in the webcast. We know this because they had to register to take part. Ten of the participants were from overseas. This could be due to the early time of day for many people around the world.